Are family entrepreneurs the better capitalists?

Author: Harold James

Counter question: Is the liver more important than the lungs?

There is a paradox that family firms in some countries are blamed for low investment and low growth – that is the story that is often told in Italy and France – while in other places (notably Scandinavia) family capitalism is seen as a source of trust and dynamism. This debate is has now become a hot topic on a global scale.

The history of Europe tells us that family capitalism has been particularly important in countries and societies with profound unrest and instability. Family ownership is a way of managing risk in a high-risk environment, whether that risk is political (as in the first half of the twentieth century) or economic (as in the early twenty-first century’s globally transformed markets). But that management of risk can set family businesses up for failure. The Brazilian family, the Odebrechts, were first feted, then held up as the embodiment of cronyism. In 2010 the IMD business school in Lausanne chose Odebrecht as the world’s best family firm. By 2017 the same business was described as a gangrene that corrupted the whole of Latin America.

Family ownership has the advantage of being visible and identifiable, in contrast to the anonymous capitalism of large numbers of individual investors or the facelessness of institutional investors. If ownership is an important or even the defining feature of the capitalist process, it is desirable for it to be transparent. The greater difficulties that arise when passing on ownership in family firms offer a guarantee of continuity.

The property becomes family members’ stake in the business, resulting in higher levels of commitment. This means that it may be easier to motivate managers and workers than in a setting in which they do not know whether tomorrow the (faceless) owners in the US style corporation of the twentieth century might walk away. The family and its long-term vision thus offered a striking and reassuring alternative to the emphasis on “shareholder value” that had been so fashionable in the 1990s, and had been linked with the “Americanisation” of business conduct.

“When economic regions in Asia look for successful role models, they look to the dynamic family firm.”

Harold James

This historical role of the family firm is confirmed by recent academic work which suggests that in developing countries economically transitioning family firms play a major role. With the liberalisation of the Indian economy since 1991, family groups (which many predicted should disappear over the course of development) have become more important. The Indian Tata dynasty very explicitly saw its role as filling a hole left by the inadequacies of state-centred growth; and has, along with the Mittals, internationalised itself very quickly.

Family companies are also at the core of the majority of recent economic growth in China. When Asian economies look around for models of successful performance, they hardly look to the large Anglo-American corporation – that was the model of the last century – but to the dynamic and entrepreneurial family firm. That is the model of the future, but it has its own very peculiar risks.

In every country where family business has been prominent, the fact of that prominence alone is sufficient to make for a contentious debate about the extent to which this style of business has restricted growth and development. These debates are classic instances of an attempt to reach a conclusion that oversimplifies complicated social phenomena. Maybe it would be better to see the family as a biological facilitator in which some aspects are, at times, dysfunctional. Complaints about the family and its influence are analogous to the sentiment that biological organs can malfunction: while this is true, the analysis does little to acknowledge the function of the organ when it is carrying out its role as expected.

Harold James is Professor of History and International Affairs at Princeton University, specialising in the economic and financial history of Europe. The Haniel Foundation supported him in his work on his book Family Capitalism.